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For-profit colleges: Do they shortchange students?

Could for-profit colleges be the educational equivalent of the subprime-mortgage market?

Could for-profit colleges be the educational equivalent of the subprime-mortgage market?

That’s one warning raised Thursday by a witness at a Senate hearing, as the schools come under government scrutiny for alleged practices driven more by profit margins than by educational goals.

Although nonprofit institutions still make up the majority of US colleges and universities, enrollment at for-profit colleges has grown by more than 200 percent in the past decade. Their flexible and convenient offerings, including online degrees, have been especially attractive to adult working students.

For-profit colleges currently enroll about 10 percent of all college students in the United States. But they receive about 23 percent of federal loans and grants, and their students default on loans at higher rates, according to a report released by the Senate committee that held the hearing.

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“We don’t know what risk we are taking by investing an increasing share of our federal financial-aid dollars in this sector,” said Sen. Tom Harkin (D) of Iowa, who launched a series of hearings Thursday as chairman of the Health, Education, Labor and Pensions Committee. “We have a responsibility to ensure students are being well educated and that schools are using taxpayer dollars responsibly.”

Hundreds of students have shared with Senator Harkin’s office their stories of being aggressively recruited and misled about the career and salary potential offered by for-profit schools.

One former student who testified Thursday was Yasmine Issa, a young divorced mother who sought a career as an ultrasound sonographer.

Issa enrolled in a $32,000 program at the Sanford-Brown Institute in White Plains, N.Y., after officials there told her she’d be able to sit for a certification exam and get a job upon completion. When she went looking for ultrasound jobs, she was told the program was not accredited.

A nearby community college offered an accredited program for half the cost, she found out later. She’s now saddled with $15,000 in federal student loans.

Other practices that witnesses described include schools receiving loan or grant payments for students no longer enrolled, encouraging prospective students to buy illegitimate high school diplomas, and manipulating data to appear to be meeting federal requirements to qualify for student aid.

The fundamental problem, one witness said, is that the industry depends heavily on government loans, when the government bears all the risk if students default. The incentive is to enroll as many students as possible and charge high tuition to maximize the loans and grants that flow to the schools, said the witness, Steven Eisman.

The portfolio manager for FrontPoint Financial Services Fund predicted the subprime-mortgage downfall. At the hearing, he drew a parallel to pushing through mortgages that people couldn’t afford.

For-profit colleges have been motivated to grow as investors watch the value of the publicly traded schools. The resulting rapid growth spells trouble, Mr. Eisman said.

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While he acknowledged that he has a financial stake – because he engages in short selling, or betting against companies or industries – he said, “It is my hope that there’s still time to do something, and that’s why I’m testifying here today.”

Senators on the committee acknowledged the important role that the for-profit sector has played, particularly in meeting the needs of adult working students. But while some expressed outrage over what appear to them to be systemic problems, others urged caution against overregulating in response to what they see as a few bad apples.

Sen. Michael Enzi of Wyoming, the committee’s ranking Republican, urged using “a scalpel, not a machete.”

A defender of the sector expressed disappointment at a witness list made up primarily of critics. Harris Miller, president of the Career College Association, which lobbies on behalf of more than 1,800 for-profit schools, was not a witness but said in a written statement that in future hearings, he hopes “to work with [Harkin’s] committee to truly inform and educate on the value of private sector institutions and their role in achieving President Obama’s goal of returning the US to number one in the world in higher education by 2020.”

In the 1990s, a number of small for-profit schools were shut down for outright fraud. Today, the landscape is more complex.

“The for-profits now are regionally accredited colleges [and] big publicly traded corporations…. One can argue that they’re too expensive and criticize them for their default rates, but it’s not the same as saying they’re in a straight rip-off business,” says Kevin Carey, policy director of Education Sector in Washington, in a phone interview. “The bottom line is the reason this industry has grown is that they’re serving a market that the traditional colleges are either unwilling or unable to serve.”

Loopholes in current regulations have allowed troubling practices to continue – such as schools giving recruiters financial incentives for the number of students they enroll – according to witness Kathleen Tighe, the US Department of Education’s inspector general.

The Education Department recently released new proposed rules intended to close such loopholes and make information about for-profit colleges clearer to consumers.

Under one rule, schools would have to provide prospective students with graduation and job-placement rates for various programs. A further development of a rule known as “gainful employment” is still in the works. It’s controversial because it could potentially hold for-profit schools accountable for whether their graduates earn average salaries high enough to enable them to pay off their debts.